The record high reached by the Nasdaq 100, an index made up of the biggest U.S. technology stocks, has led some market commentators to question whether another bubble reminiscent of the disastrous dotcom one in early 2000 is on the horizon. Other analysts argue that valuations are worth every penny, at least among the index’s largest constituents. (See also: What are the early warning signs of a tech bubble?)
In its latest portfolio strategy research note, Goldman Sachs claimed that encouraging trends should see the Nasdaq 100, which returned 32 percent over the past 12 months — versus the 19 percent return posted by the S&P 500 — continue to outperform the wider market this year and in 2018. However, the bank adds that returns from better sales and earnings growth will be less spectacular, due to higher valuations.
Driving Goldman's optimism is a healthier economic environment, which generally tends to boost consumer spending and explosive growth stocks, and a recognition that the five largest names within the Nasdaq 100 index are well positioned to benefit from big technological changes.
Tech Titans on a Roll
While the S&P 500 is fairly evenly distributed, Goldman Sachs notes that 42 percent of the Nasdaq 100 is made up of just five companies. Together, Apple (AAPL), Alphabet's Google (GOOG), Microsoft (MSFT), Amazon (AMZN) and Facebook (FB) beat the S&P 500 year-to-date by an average of 16 percentage points, an impressive run that the investment bank estimates is likely to continue.
Apple, which accounts for a whopping 12 percent of the Nasdaq 100, is expected to enjoy another stellar year, driven by the launch of new products and growth in service revenues. Moreover, Goldman believes that Google’s exposure to buoyant advertising, mobile search and enterprise cloud computing markets can help the company to deliver a 19 percent rise in 2018 sales. (See also: How Far Will Apple's Stock Run?)
Elsewhere, Goldman’s analysts are confident that Microsoft will benefit from expense discipline, Facebook from its exposure to “one of the best secular growth markets” and Amazon from the ongoing shifts to cloud computing and online retailing, which it claims have yet to be fully factored into consensus estimates.
Next year, consensus forecasts have penciled in Nasdaq 100 sales and earnings growth of 8.4 percent and 13.5 percent, respectively, versus the 5.3 percent and 9.7 percent expected from the S&P 500, according to Goldman.
Technology stocks are also expected to outperform throughout the rest of 2017, albeit at a slower rate. “2017 estimates are mixed,” the bank’s analyst said. “Nasdaq 100 sales in 2017 are forecast to grow by 8.3 percent vesus 7.5 percent for the overall S&P 500 (5.3 percent excluding energy), the smallest gap since 2008.” (See also: Goldman Sachs Favors Equities in Europe Over U.S.)